Reading 43: fixed income markets- issuance, trading, and funding

Question 1

LIBOR rates are determined:
by countries’ central banks.
by money market regulators.
in the interbank lending market.

Answer 1

LIBOR rates are determined in the market for interbank lending. (LOS 43.b)

Question 2

In which type of primary market transaction does an investment bank sell bonds on a commission basis?
Single-price auction.
Best-efforts offering.
Underwritten offering.

Answer 2

In a best-efforts offering, the investment bank or banks do not underwrite (i.e.,purchase all of) a bond issue, but rather sell the bonds on a commission basis. Bonds sold by auction are offered directly to buyers by the issuer (typically a government). (LOS 43.c)

Question 3

Secondary market bond transactions most likely take place:
in dealer markets.
in brokered markets.
on organized exchanges.

Answer 3

The secondary market for bonds is primarily a dealer market in which dealers post bid and ask prices. (LOS 43.d)

Question 4

Sovereign bonds are described as on-the-run when they:
are the most recent issue in a specific maturity.
have increased substantially in price since they were issued.
receive greater-than-expected demand from auction bidders.

Answer 4

Sovereign bonds are described as on-the-run or benchmark when they represent the most recent issue in a specific maturity. (LOS 43.e)

Question 5

Bonds issued by the World Bank would most likely be:
quasi-government bonds.
global bonds.
supranational bonds.

Answer 5

Bonds issued by the World Bank, which is a multilateral agency operating globally, are termed supranational bonds. (LOS 43.f)

Question 6

With which of the following features of a corporate bond issue does an investor most likely face the risk of redemption prior to maturity?
Serial bonds.
Sinking fund.
Term maturity structure.

Answer 6

With a sinking fund, the issuer must redeem part of the issue prior to maturity, but the specific bonds to be redeemed are not known. Serial bonds are issued with a schedule of maturities and each bond has a known maturity date. In an issue with a term maturity structure, all the bonds are scheduled to mature on the same date. (LOS 43.g)

Question 7

A financial instrument is structured such that cash flows to the security holder increase if a specified reference rate increases. This structured financial instrument is best described as:
a participation instrument.
a capital protected instrument.
a yield enhancement instrument.

Answer 7

Floating-rate notes are an example of a participation instrument. (LOS 43.h)

Question 8

Smith Bank lends Johnson Bank excess reserves on deposit with the central bank for a period of three months. Is this transaction said to occur in the interbank market?
Yes.
No, because the interbank market refers to loans for more than one year.
No, because the interbank market does not include reserves at the central bank.

Answer 8

The interbank market refers to short-term borrowing and lending among banks of funds other than those on deposit at a central bank. Loans of reserves on deposit with a central bank are said to occur in the central bank funds market. (LOS 43.i)

Question 9

In a repurchase agreement, the percentage difference between the repurchase price and the amount borrowed is most accurately described as:
the haircut.
the repo rate.
the repo margin.

Answer 9

The repo rate is the percentage difference between the repurchase price and the amount borrowed. The repo margin or haircut is the percentage difference between the amount borrowed and the value of the collateral. (LOS 43.j)